WORLD OF INDUSTRIES - MOTION, DRIVE & AUTOMATION 4/2017

Trump’s America:

Trump’s America: Redefining itself in the evolving global economy NEWS AND MARKETS Reduce trade deficits, provide tax cuts, deregulation for American manufacturers and unlock America’s shale oil and natural gas reserves to boost industrial growth, are some of the important issues that chart the direction for Trump’s America In many of his interviews to newspapers and other leading media outlets, President Trump has given descriptions of where he wants to lead America’s economy and how plans to do it. His target is to boost economic growth which will ensure that more Americans have wellpaid permanent jobs. In the context of GDP growth, he has spoken about 4 % and at times even about 6 %, which is way higher than what most economists believe is a sustainable pace for America. His idea of smart trade In January 2017, as the President of United States, Donald Trump signed an order to withdraw from any further negotiations on the Trans-Pacific Partnership. He aims to replace it with a series of bilateral agreements. Similarly he has targeted re-negotiating the ‘Nafta’ or North America Free Trade Agreement, which involves Canada, U.S and Mexico. Trump believes that the best way to get better jobs and faster growth is by re-negotiating the trade deals that America has in place with its trading partners. His perception of free trade agreements is more focused towards the balance of the trade, for him the trade deal is a fair one if the trade flows are balanced. He speaks of rewarding those companies who manufacture in America and punish those who do not. For example, the U.S. imports goods worth $ 295 billion from Mexico, which mainly consist of manufactured products, fruits and vegetables. Trump talks about hitting Mexican imports with a 35 % tariff. These tariffs would only end up in increasing prices of the imported goods. Only Author: Sushen Doshi, International correspondent for World-of-Industries the U.S oil companies would benefit from these tariffs, as it would increase the prices of Mexican imported oil. What Trump advocates for is economic nationalism and protectionism, that does not work in today’s globally integrated economy. If America started to take protectionist stance on its trade policies then other countries would retaliate, which would reduce American exports. On the other hand, a careful attention to why America’s growth since the recession has been slow, reveals that it is the international trade that hasn’t rebounded as much as it should have and Trump’s tariffs and trade wars would only worsen that. Another drawback of imposing duties on imports might affect profitability of American corporations. Consider that Trump imposes import duties on all imports from China, now the U.S. imports goods worth $ 480 billion in consumer electronics, clothing and machinery from China. A lot of those imports are from U.S. corporations that send raw materials to China, and ship assembled or finished products back to U.S. Trump’s tariffs would reduce the profits for these American firms and raise prices for American consumers. Also, without a doubt, China will retaliate, raising its tariffs on imports from U.S. companies, which would affect U.S. exports and hurt American companies again. But President Trump’s concerns about America’s trade deficit with the almost all of its major trading partners is a valid concern and as a country, America needs to address this issue as it drains the economy by about $ 500 billion. The issue of America’s trade deficit is not because of any flaw in the global trading system and neither is any of America’s free trade agreement biased against it. Instead, the trade deficit has more to do with the gap between how much the Americans save and spend. The deeper issue is that Trump’s policies have a short sighted view of the American economy. In his perspective, the barometer for the success of trade deals is its effect on manufacturing jobs. But emerging technologies that are improving the manufacturing process are causing more turbulence in job market than any of the trade deals. And with Trump’s view of reward and punish, the companies unable to source jobs to low wage destinations will stay competitive by investing more in high-tech machines and automation. This will help the productivity and profit margins to rise, but it may not help the lessskilled factory workers who the political class claims are their priority. Even if such policies produce a short lived growth, in the long term America risks ending up more indebted and economically ill. WORLDOFINDUSTRIES – MOTION, DRIVE & AUTOMATION 4/2017

Paris climate deal and energy policy In June of 2017, Donald Trump announced that the U.S. would withdraw from the Paris Climate Accord. Along with other 195 countries, the United States had pledged to cut down its greenhouse gas emissions by 2025 from 26 to 28 % below 2005 levels. Countries had also committed a $ 3 billion in aid for poorer countries by 2020 to achieve their emissions targets. The overall goal of the Paris Climate Accord is to keep global warming from worsening by another 2 °C, above preindustrialization levels, which is considered as the tipping point by many experts. Beyond the tipping point the consequences of climate change become unstoppable. According to Europe’s emissions database for global atmospheric research, in 2015, in terms of emissions per capita, the U.S. pumped out more CO 2 than China and India combined. On average, each individual living in the United States contributed 16 tons of CO 2 . But each individual living in China and India contributed 7 and 2 t on average, respectively. America is responsible for 20 % of the world’s carbon emissions. It would be difficult to achieve any significant results without the participation from America and China in particular. The reason for America’s withdrawal from the Paris deal is that, Trump wants to negotiate a better deal that favors America’s interests. With the current deal, Trump claims that America would loose $ 3 trillion in GDP if it were to impose regulations on industries to meet the emissions target. To consider the potential impact of the Paris deal on the GDP, reports from analysts that are not politically aligned, have calculated the carbon tax rate that would be needed for the U.S. to meet its pledged emissions target under the Paris Agreement by 2025. These globally reputed think tanks have concluded that the percentage of the carbon taxes in 2025 and their corresponding economic costs to the GDP are modest and not even close to what the President is claiming. At the same time the researchers also concluded that delaying the execution of the agreement would raise the cost of a carbon tax needed to meet the 2025 emissions target. The actual cost to the economy depends on how the U.S. would go about meeting its target emissions reduction. Even though Trump wants to re-negotiate the terms, leaders from Germany, France, Italy and other leading nations have made it clear that the accord is non-negotiable. Countries like India and China who are responsible for a large percentage of global carbon emissions, have also joined other countries in stating they remain committed to the Paris accord. America’s withdrawal from a leadership position creates a vacuum that China is ready to fill. Business leaders from leading American corporations like Tesla and General Electric have said that this will give foreign competitors an edge in terms of technology, innovation, application and global market share in the clean energy industries sector. Trump’s energy policy focuses more on America’s vast untapped domestic energy reserves. One of Trump’s campaign promises was to eliminate the climate action plan and allow more drilling of shale oil and natural gas on federal lands, which brings in jobs in the energy sector to millions of Americans. Taking advantage of the trillions of dollars worth untapped shale oil and natural gas reserves, Trump’s policy aims to use this revenues from energy production to rebuild America’s ailing infrastructure. More supply means prices of oil and other energy sources will remain low, which will help to reduce the cost of manufacturing and boost America’s cost competitiveness in the industrial manufacturing sector. Supply-side economics In his speeches, Trump promised to grow the economy by 6 % annually to increase tax revenues. Though it may sound wonderful, the fact is that it would be too fast for a healthy economic growth. It would create inflation, a boom-bust cycle, and then a crash. Trump intends to achieve such growth numbers despite cutting taxes. By now it is clear that he firmly believes in the supply-side economics. Supply-side economics is the theory that says increased production drives economic growth. The supply-side policy focuses on aiding businesses to grow, with tools such as tax cuts and deregulation. Companies that benefit from reduced taxes and lesser regulation, aim to increase production and therefore hire more workers. The resultant job growth creates more demand for goods and services which further boosts growth. With enough growth, the government could then make up for the lost revenues incurred due to reduced taxes. The Laffer Curve is the theoretical foundation of supply-side economics. Economist Arthur Laffer developed it in 1979. He argued that every dollar cut in taxes reduces government spending and its stimulative effect by exactly one dollar. How much effect these tax cuts have depends on conditions when they are applied. Was the economy growing or in a recession? Which taxes were cut? How high was the tax rate prior to the cut? If taxes were in the prohibitive zone, then these cuts will have the best effect. If taxes are already low, then cuts won’t do as much. They will only reduce government revenue and increase deficits without boosting growth enough to offset the revenue lost. According to Arthur Laffer, the founder of the supply-side economics, the taxes in America aren’t high enough as they were under Reagan administration, for this theory to show significant results today. Photographs: Lead foto Fotolia z MOTION, DRIVES & AUTOMATION Editors-in-chief: Dipl.-Ing. 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